HSBC 2008 Annual Report Download - page 199

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default and the amount of consequential loss, based
on the delinquency of accounts within a portfolio of
homogeneous accounts. Other historical data and
current economic conditions are also evaluated when
calculating the appropriate level of impairment
allowance required to cover inherent loss. In certain
highly developed markets, models also take into
account behavioural and account management trends
revealed in, for example, bankruptcy and
rescheduling statistics.
When the portfolio size is small, or when
information is insufficient or not reliable enough to
adopt a roll rate methodology, a formulaic approach
is used that allocates progressively higher percentage
loss rates the longer a customer’s loan is overdue.
Loss rates reflect the discounted expected future
cash flows for a portfolio.
Generally, historical experience is the most
objective and relevant information from which to
begin to assess inherent loss within each portfolio. In
circumstances where historical loss experience
provides less relevant information about the inherent
loss in a given portfolio at the balance sheet date –
for example, where there have been changes in
economic conditions or regulations – management
considers the more recent trends in the portfolio risk
factors which may not be adequately reflected in its
statistical models and, subject to guidance from
Group Finance and GMO Risk, adjusts impairment
allowances accordingly.
Roll rates, loss rates and the expected timing of
future recoveries are regularly benchmarked against
actual outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans are normally written off, either partially or in
full, when there is no realistic prospect of further
recovery. Where loans are secured, this is generally
after receipt of any proceeds from the realisation of
security. In the case of residential mortgages and
second lien loans in HSBC Finance, loan carrying
amounts in excess of net realisable value are written
off at or before the time foreclosure is completed or
when settlement is reached with the borrower. If
there is no reasonable expectation of recovery, and
foreclosure is pursued, unconstrained by delays
required by law or regulation, the loan is normally
written off no later than the end of the month in
which the loan becomes 240 days contractually past
due.
Unsecured personal facilities, including credit
cards, are generally written off at between 150 and
210 days past due, the standard period being the end
of the month in which the account becomes 180 days
contractually delinquent. This period may be
extended, generally to 300 days past due but in no
event exceeding 360 days past due, in the case of
HSBC Finance’s unsecured personal facilities other
than credit cards.
Cases of write-off periods exceeding 360 days
past due are few but arise, for example, in a few
countries where local regulation or legislation
constrain earlier write-off, or where the realisation of
collateral for secured real estate lending extends
beyond this time.
In the event of bankruptcy or analogous
proceedings, write-off may occur earlier than at the
periods stated above. Collections procedures may
continue after write-off.
Cross-border exposures
Management assesses the vulnerability of countries
to foreign currency payment restrictions when
considering impairment allowances on cross-border
exposures. This assessment includes an analysis of
the economic and political factors existing at the
time. Economic factors include the level of external
indebtedness, the debt service burden and access to
external sources of funds to meet the debtor
country’s financing requirements. Political factors
taken into account include the stability of the country
and its government, threats to security, and the
quality and independence of the legal system.
Impairment allowances are assessed in respect
of all qualifying exposures within these countries
unless these exposures and the inherent risks are:
• performing, trade-related and of less than one
year’s maturity;
• mitigated by acceptable security cover which is,
other than in exceptional cases, held outside the
country concerned;
• in the form of securities held for trading
purposes for which a liquid and active market
exists, and which are measured at fair value
daily;
• performing facilities with a principal (excluding
security) of US$1 million or below; or
• performing facilities with maturity dates shorter
than three months.
Credit exposure
Maximum exposure to credit risk
(Audited)
HSBC’s exposure to credit risk is spread over
several asset classes, including derivatives, trading